Merit Medical Systems, Inc. (MMSI) Q4 2016 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the Merit Medical Systems Inc. fourth quarter and year-end 2016 conference call. At this time, all participant lines are in a listen only mode to reduce background noise but later, we will be holding a question-and-answer session after the prepared remarks and instructions will be follow at that time. [Operator Instructions]. As a reminder, today's conference call is being recorded. I would now like to introduce your first speaker for today, Chairman and CEO, Fred Lampropoulos. You have the floor, sir.

Good afternoon ladies and gentlemen and thank you for taking the time to join us. We have lot to talk about today. So we will start our meeting today by having Brent McDonald, one of our staff lawyers, read our Safe Harbor provision. Brent?

Thank you Fred. During our discussion today, reference maybe made to projections, anticipated events or other information which is not purely historical. Statements made in this call which are not purely historical including statements regarding our operating or financial results, prospective or completed transactions, governmental or regulatory matters, including investigations or proceedings are forward-looking statements and are subject to risks and uncertainty such as those described in our Annual Report on Form 10-K and other filings with the Securities and Exchange Commission. We caution you that our actual results will likely differ and may differ materially from our anticipated results. Forward-looking statements are subject to change and are not intended to be relied upon as predictions of future operating results. Any forward-looking statements made during this call are made only as of today's date and we do not assume any obligations to update any such statements. Although our financial statements are prepared in accordance with accounting principles which are generally accepted in the United States, our management believes that certain non-GAAP financial measures provide investors with useful information regarding the underlying business trends and performance of our ongoing operations and can be useful for period-over-period comparisons of such operations. A reconciling table included in our release and discussed on this call sets forth supplemental financial data and corresponding reconciliations of GAAP financial statements. Readers should consider these non-GAAP measures in addition to, not as a substitute for, financial reporting measures prepared in accordance with GAAP. These non-GAAP financial measures exclude some items that may affect net income. Furthermore, these calculations may not be comparable with similarly titled measures of other companies.

Okay. Brent, thank you very much. That's a lot of stuff to read. But as I mentioned, we have a lot to cover today. I would like to do it in this order. I am going to talk about the quarter. I am going to talk about the year. I am going to talk about the recent acquisitions and then I am going to talk about our guidance. So let me start by talking about the quarter. As you see from our press release, our revenues were $157.7 million. That would be about $159 million on a constant currency basis. We were a little bit short. Now, we are not normally short. I want to just go right on the record from the very beginning saying, this is not a concern to me and we hope it's not to you. And the reason is, as we were so busy in these acquisitions and a lot of work being done and there were three specific areas that lowered that sales number. We have an FX effect and Bernard will talk about this in a moment. We had a bit of a decline in the Cook business and the DFINE business which we reorganized and restructured and let a lot of people go, as you are all aware. Even though that is all completed, I think, affected some revenues in that particular area. Again, so that's spending too much time on it. With the new products and the momentum of the business, I am still satisfied. But what I would like Bernard to do is just to take a second and go over more of the highlights, including the core business and some of the other data as it pertains to the quarter. Bernard?

So on the revenue side, as Fred had just commented, hit $157.7 million, $159 million on a constant currency basis. And the growth rate in the quarter, based on those numbers, were 14%, 14.9% on a constant currency basis and organic growth is 7.9%. So again, for us, that's very strong growth in the quarter and again a little bit shy of consensus. But we are confident that we can continue to grow through 2017. And again, those growth rate are very strong.

Thank you for that commentary. And now let me move to the earnings side and the gross margins. You can see, the gross margins improvement which we are very pleased about and that's five consecutive quarters of gross margin improvement. In addition, you will see that the bottomline, the earnings per share, on a non-GAAP basis were $0.31 and I believe that's ahead of -- we beat the numbers. I will let Bernard go ahead and comment on those.

So yes, on a non-GAAP basis was $0.31 compared to $0.24 in Q4 of 2015, an increase of 28% on the earnings line. And then, there's a number of factors driving that number. One is the strong revenue growth that we have seen, strong margin improvement growth driven by a number of factors, again by bringing on DFINE and HeRO, which were higher margin products. That helped our margin profile. The medical device tax was a components of that. And we have also seen strong production efficiencies coming from our operations group, which filters through in the fourth quarter to help support that and gross margin number 48.4%, again that's very strong on that area of the business and we continue to lever the income statement. As we see, our OpEx number came in at 34.1% for the quarter that represented a sale versus 34.9% in the comparable quarter of 2015. And that's in-line with what we would have forecast and we have held our R&D expense to where we had targeted for the year. Our SG&A expense was a little bit lower than where we had targeted for the quarter and, I think, 200 basis points off on where we had forecast for the year. So again, a lot control on that OpEx line gross margin goal and that has filtered down into our earnings number.

So the bottom line in terms of the year and the quarter, if we combine those and discuss those is, we hit every one of our parameters. We hit our sales number in our range. We hit our gross margins in our range. And we also hit our earnings in the range that we had discussed for the year. And I think we are pleased with that. I think the exciting part, of course, is the momentum we see as we move forward and I will move on to that in just a moment. So that's kind of the overview and of course we will answer questions about that a little bit later on. Let me move on to the acquisitions. It's interesting and we appreciate your patience with this, because we wanted to talk about all of these things in one call so that we could talk about our forecast for next year. But the Argon business is something that I have actually tried to buy five different times and it was too expensive. There are too many issues and those sorts of things. At this particular point though, we own it and we are able to buy it for $10 million and this is a business that we are attributing about $35 million of revenue to $35 million, $36 million and we are giving ourselves a little bit of room there to make sure, because they are unaudited at this point, that how that will all fit in and we will talk about how it fits in for the year. We have some unique advantages and a reminder that Merit is in the transducer business in a big way. We produce over million pressure transducers a year. We also make all of our pressure sensors, all of which will be consolidated into the production of these products. Another thing is that I think is exciting for us as you start taking a look at operational leverage is the ability that we have of adding two million additional blood pressure transducers, but it's also stopcocks, pressure tubing. It also includes drip chambers, all the things that we either source or that we make. And I think maybe the most important issue here is what it means in terms of the value proposition. More and more, as you all know, our companies need to have the ability to bundle if they were to be able to go to that C-Suite and talk about what they bring to the party. And we know our competitors, Boston, Medtronic, Cardinal and others use those techniques and tools to build their businesses. Well, Merit is broadening that base and the other thing I think is interesting about this is the primary business is located in Japan and Europe. Now why is Japan important? We are in the process and have just recently come to an agreement where over the next couple of years we will be transitioning from a single distributor to a more of a Chinese model that we have used in our business, which has grown that business substantially. And as you all know, China and Southeast Asia is our fastest growing. But Japan has been lingering and part of that is because there were some conflict in the various channels. For instance, our distributor has a biopsy device. We have one. Our distributor has this and we have that. And so we just believe that this will be the best situation for Merit and we are in that process. It will take you a little over year to transition all that business. But essentially what it does is it doubles the revenue. So we are going to take essentially the middleman out. We will own all the licenses and we think that we can grow Japan substantially with our new product. So that was part of the strategy as well as the business and the other half of it which is in Europe, very little in the United States. Let me just kind of tease you a little bit. At one time, this particular business before they had gotten the patent suit many years ago with Edwards, now those patents have expired and they can come back in that state, was doing over $100 million a year just in the United States. It's a business I grew up in. It's a business that I am very familiar with. And then we also now are going to combine those businesses with other Merit products that we have that fit very nicely as well as the Catheter Connections. So lee me go that and talk to you about that. Now a majority of our purchase price for this transition was for Catheter Connections. It's a company based here in Salt Lake City. Catheter Connections is essentially a virtual company in that they didn't do any manufacturing. Their molding was outsourced. The production was outsourced. And Merit of course has all those capabilities to produce and we are going to still use an outside vendor for part of that, but we are moving all of the molds in-house. We believe that this business will improve almost 60% this year and we think it has a very, very dynamic growth opportunity. Some of the accounts that we have in this antiseptic cath business, which really deals with hospital acquired infections. But before I go into the accounts, let me just add another little tidbit. Sometime people say, well this is just associated with the ACA and ACH going away. Well, I don't know what's going to happen to the ACA and neither does anybody on this call today. We all have ideas and thoughts and the administration has plans. But to-date, none of us really know what that's going to be. But whether there is the ACA or any other plan, there will still be issues of patient care and infections that cost hospitals and patients a lot. And this is something that everybody has become more aware of more and more all the time. So we have places that we have recently opened like the Mayo Clinic which is now just coming onboard. We have facilities like the Yale University system. We have Tufts University. We have the BayCare system down in Florida, including Tampa General. The St. Jude Children's Hospital and of course Intermountain Healthcare in Salt Lake City the largest accounts of these products. But Catheter Connections didn't have essentially a sales force. They used a master distributor. So this is going to go into Merit's sales bag along with these other products in our cardiac division and this is going to see substantial growth and improvements in gross margins, because we have the opportunity to produce this product and produce it in greater volume. So we are very excited about this. There is some international business, but again they simply did not have a footprint that Merit has. So we think that these products are going to enhance our business. We think they are going to allow us to be more productive and we believe that all of this adds to that value proposition of the business. So Bernard, I am going to let you, if you have any comments on these particular transactions or if you like to step in?

Yes. The transactions fit directly into our CI business and we have already got the infrastructure in place to be able to capitalize on these investments and to grow them in the way that we have forecasted, particularly over the next one to five years we see a lot of opportunity there to grow this business. And in year one, there will be some consolidation, some reorganization to be done. But again, we see it as a great growth opportunity for us. And it actually fits in with everything else. So from a strategic point of view, it's a really good fit for us.

Okay. Bernard, thank you. So let's move on to the future. I think there will be other questions on the past and we will be happy to answer those in a few moments, but let's move on to the future. As I said, the fourth quarter was more of an anomaly than anything else and that we have, I think, a great expectation for growth as we go into next year. But let's talk about what's going to drive growth. We now have a full line of elation balloons. We have the gastric on the GI side and then the pulmonary balloons. I am very excited about what's going on the pulmonary balloons. First of all, we get about a 30% premium over a GI balloon and we have opened numerous accounts. They have reordered. This is a very excited area, particularly in the AERO side of the business, because that's the biggest part of our GI business. We are the leaders in pulmonary stents and these go right along with that. And then you take the others and we now have this full basket, these full complement of products and we are having a lot of success in that division, again we will see substantial growth. The CorVocet biopsy device was just released and I think you all know about my feelings about that device and the opportunity for Merit. We start talking about some of the new radial products, a new Ease, Prelude Ease is coming and has in fact been released. And one of the products you are going to be hearing a lot about. It was a little bit of a sleeper. We haven't talked much before about the Prelude Sync. It is a compression device used but there are some really unique things about it and in our slide deck, if you look at that, you will see something that is almost Apple-ish. And by that, I mean there is some great marketing and some great ideas in this that our customers that have responded to very, very much so. And we are very excited about what that means. We have at least two new guide wires and these are advanced interventional guide wires. These are the Amplatz guide wires and a new product called the True Form, which is an interventional guide wire. That's another product that's now in the process of being released. We had an opportunity recently to acquire a distribution agreement on a product called the TWISTER. One of the major companies was disturbing this product for nine years. They made an acquisition. They let this product go. They have been selling it for nine years and we picked it up and we are selling it in our GI division. There was really no cost to Merit other than the inventory and putting the Merit label on it and we are very excited about what means to that same division that sells the pulmonary balloons and the GI products. The SwiftNINJA. Well, the SwiftNINJA is meeting all of our expectations in the United States. Our price point is about $2,400. I will say that that's almost twice what I originally thought our price point would be and that's going to enhance our margins. As well as, you are very aware of the Super HeRO. And so these are products that enhance the HeRO market which we acquired last year. And there are other products that will be coming out through the year and we hope on a number of areas, whether it be PAE and others and things that are developing that we will be able to make some other announcements in the very near future. So the bottom line is, we have a full complement of products and a full pipeline right behind it. And so we see exciting day ahead. And so with that and that introduction, I will go ahead and start with the numbers for 2017. And then I will have Bernard comment on them. So our guidance for 2017 is as follows. We believe our revenues will be in the range of $713 million to $723 million. We believe that our gross margins will be in the range of 48% to 48.5%. We believe that our earnings range will be $1.15 to $1.20. Now let me just briefly comment that on some of these issues, on both the revenue side and the earnings side, we have essentially not attributed much to these two acquisitions because of the integration issues and getting them ramped up and I will let Bernard maybe talk about that in a moment. But overall, we see organic growth of at least 8% and then overall with the various acquisitions, some of which are dragging from the past, I am talking about things like DFINE and I think we get one month of the HeRO, well we are looking at about 18% to 20% growth overall in the company and that's extraordinary. And without all of this and those acquisitions, we would still be and the recent ones, we would still be in the 11% to 12% range. So these are numbers we know and have a high belief that we will be able to be successful in. And with that said, Bernard, let me turn some of that time over to you.

Just a couple of comments on the revenue. We are confident in the guidance of $713 million to $723 million. And again, as Fred has broken down, it's three areas. One is legacy growth at approximately 8%. So tracking at the same, close to the same growth rate that we have seen in 2016 that we committed to in our three-year plan. Obviously adding on the DFINE product for the first half of 2017, that will bump our numbers up to get us to, as we said, between 11% and 12%. And then the addition of the Argon and CCI products gets us to the 18% to 20% growth rate. And we have factored in the FX changes that have been taking place in the market, particularly in China and Asia-Pac. So we are conscious and aware of that and that is something that we monitor very closely. On the gross margin side on a non-GAAP basis, 48% to 48.5% and that's in line with what we have spoken about in the past and our plan of increasing margins by 100 to 150 basis points year-on-year over the next three to five years. And that's supported by growth in margin coming from the integration of DFINE, improving gross margin on the HeRO product and introduction of new products coming in that Fred has spoken about and the continued focus on operational efficiency for driving productivity within our operations group. So each of our groups has very specific targets to deliver on and for us to achieve that 100 to 150 basis points improvement. And again, that's supported by the 130 basis points improvement that we saw in 2016. And again, we have seen margin improved quarter-on-quarter for the last five quarters. And again we expect to see that same cadence in 2017 where it will improve quarter-on-quarter. OpEx will generally be in line with the 2016 numbers. There will be some reorganization costs, particularly in the first quarter to the second quarter of 2017 with regards to these businesses that we have acquired. So people just need to be conscious of that. And on the earnings side, again, going from $1.15 to $1.20 that again is based on our strategic plan to drive earnings. And we have done it in 2016. We know what's required and controlling our cost and improving gross margin. And I think that's reflected in the guidance that we have given. And just on a GAAP basis, so we just want to cover those numbers, gross margin will be between 45% and 45.5% and the earnings between $0.54 and $0.60.

Okay. Well, the important thing is, we made a commitment three years ago in a three-year plan and we will hit those numbers. We are not at this particular point going to add another year. However, we will monitor our progress as a company and when appropriate to do so and when we have visibility that would allow us to do so, we may. So we will just have to see how it goes. But the bottom line is, we have the acceleration of gross margins. I think a great revenue path. I think the operations and the guys are doing a good job of being disciplined to keep those expenses in place. And we are going to have topline, gross margin, control the expenses and grow the bottomline, integrate these businesses. And guys, we are just simply getting better and it's a good feeling around here about just kind of our general demeanor, our thought process and the things that we are doing. We are excited about the future. We hope that you are. We hope that you can see the vision of the future for Merit. And now I think unless Bernard you have anything else to say and I can see that you don't. So we will go ahead and turn the time back over the operator with a reminder that we will take as many calls with as much time as you have. Thank you for your patience. There was a lot to cover here today. I am sure we will have a lot of questions. We will do our best. And then we will be available for up to an hour following the end of the call and we will be available for further clarification on things that aren't appropriate to discuss. That being said, let's turn the time back over to the operator and we stand ready to answer your questions.

Before we begin our question-and-answer session today, we do have a few additional comments by Bernard Birkett, Merit's Chief Financial Officer. You have the floor, sir.

Thank you. We would just like to quickly summarize the results for 2016. Worldwide revenue was $157.7 million, $159 million on a comparable constant currency basis for the quarter, up 14% and 14.9% on a comparable constant currency basis over Q4 of 2015. FY 2016 worldwide revenue of $603.8 million and $608.8 million on a comparable constant currency basis, up 11.4% as reported and up 12.3% on a comparable constant currency basis. Q4 GAAP EPS was $0.17. Q4 non-GAAP EPS was $0.31. FY 2016 GAAP EPS was $0.45. FY 2016 non-GAAP EPS was $1.01. Q4 2016 GAAP gross margin was 44.5%, compared to 43.6% in Q4 of 2015. Q4 2016 non-GAAP gross margin was 48.4% compared to 45.6% for Q4 of 2015. And just to clarify one earlier comment, OpEx expenses were just over 20 basis points, not 200 basis points that I previously mentioned. And with that, I will hand back to the operator who will take Q&A.

[Operator Instructions]. We will be taking our first question from line of Jason Mills from Canaccord Genuity. Your line is open.

Hi. Thank you for taking the question. Fred, can you hear me okay?

I can, Jason. Thank you.

Thank you and congratulations on all the progress. I wanted to start with the line item that I ask you most about and perhaps you get a lot of questions about from investors. The gross margin line was outstanding in the quarter. It ended up being well over 100 basis points better than that what we were modeling in the quarter and your guidance for next year is another 100 basis points over what we are modeling. So could you give us a sense for the key drivers? You sort of went over them briefly. But maybe a little bit more color on what's driving that gross margin line, even to levels beyond the expansion we were modeling and what gives you the confidence in 2017 to be able to get the full year over 48%? And then I guess a separate question on the gross margin line for Bernard, sort of the cadence as we go quarterly through the year and how gross margin should track quarterly from Q1 to Q4? I will start there.

Okay. Well, thank you very much for the compliment. Gross margins have always been the discussion and where we are going to get the best bang for the buck. So there's a number of unsung heroes and unheard of heroes in the company. And two of the guys that really credit here is our Chief Operating Officer, Ron Frost and his partner Mr. Peterson. I think Neil Peterson is our Director of Manufacturing. We have worked hard in automation. We worked hard in efficiencies. I think Ron, since he has picked this ball up and he has involved with the company now for well over 20 years. But I think there is a real focus when you take that along with the additional analysts and people that Bernard has brought to it and they work together to talk about the goals and hold people accountable, it takes a lot of the work off me so I can go do the things that I do better and these operational guy. So that's part of it. I think another part, Jason, is the mix. We talked about things like the HeRO and although it's relatively small, we took that and we originally modeled it 55%. It's closer to 70%, 75% and that effort goes to Neil and his team. So I think those are some of the issues. I think one of the other things that we did not mention and I would like to just throw this in because I think this is important is that we haven't talked a lot about DFINE today because we have been through and doing that work but we have new R&D programs and new products that we will be rolling out with DFINE. We have new products that have already been assigned to both Catheter Connections as well as our Argon business. And we are doing what Merit does well. But probably the best part of this is, you have all of these new products that have either been eating up R&D expense or haven't had the volumes because they are just getting started. But the one that comes to mind, I have got to tell the story is of product is Prelude Sync. Again, radial procedures are a big deal. This product, if you go look at our slides, you will see why I said it was somewhat Apple-ish. You will see why people want to buy this product. Our distributor in South Africa bought on the first day that we released the product, half of our inventory. And we have doubled the forecast. Doubled it again. And now we are talking about doubling it one more time. So we are going to have and this is going to produce about 65% or 70% gross margin. So it's mix. Its focus. It's the higher margin products. It's all of those factors and the great work that's being done over in the operations side, both in terms of the assignment of bringing cost down, negotiating. There is a lot of factors. But they are all running kind of the same time. So these things are all running in tandem. And we are doing, Jason you and I had this conversation in your office. It's all about execution. And that's what these guys have been doing. So the credit really goes to the operational team here and the sales team. You will also notice, a long answer, you also notice that there is less focus and activity on the kits and some of these other areas because there is lower margins and they are really spending their time on these higher margin products that are very exciting for us. So there is a lot of factors going in there, but each and every one of them contribute one way or another. And another thing, I maybe getting into too much detail but some of these, both the Argon and the Catheter Connections, initially will be a little bit lower. So if those weren't in there, we would actually have even higher, but our intention is, once we bring those into alignment with the molding, the operations and the things that we are doing, which won't take us long, they will start and be a further contributor to our sustainment of gross margin. And that goal to get to 50%. That is the near-term goal and we have talked about for years is to get that gross margin to 50%. So I am going to ask Bernard, you want to comment on those things, please?

Yes. To quickly summarize it, it mix. And DFINE has been a big part of that in Q4 and HeRO, we are actually starting to see improved gross margins there. New products and then operational efficiency. And that has been the focus throughout 2016. And we have seen gradual improvement there throughout the year. And again that is the focus for 2017 and it is to execute on that. And once we hit that, we will continue to drive margin improvements.

So one other thing, Jason, in that is, this will be the third year of our plan and we thought about maybe even adding a year. I think we are going to wait and look to about mid-year, look at these new products and then I think at that particular point we may very well come out with whatever adjustments and what other forward-looking we can look at by adding another year. Because I like people looking forward and I think it's good for our company to have our staff look at those goals and look at those commitments so that we are always reaching and putting forth the effort that's necessary to be successful.

Thanks for all the color. Just the last part of the question. Maybe Bernard, if you could comment on how you would have us calibrate our expectations for gross margin by quarter through the year? And then I have a few follow-ups.

We typically don't give quarterly guidance and obviously we have just given annual guidance in the past and that's that we are sticking to for 2017. And what the trends, I think that the first quarter, we have just got to be careful. That's usually little bit lower as we start production back up and then we are integrating two new businesses at the same time, which we have already commented on as well. You have got to bear those costs in mind.

Okay. So maybe a little bit below the bottom end of the range to start the year and hope maybe a little bit above the top end of the range as you exit the year. Is that a fair way to look at it?

Yes.

Okay. Great. And then Fred, a question on the acquired businesses, the recently acquired businesses. You gave us some good color on how you are guiding to 2017, but as you think about the guidance range and the revenue that bought in the mid-40 range, would you have us model that in that range? Would you have us model maybe 10% lower than that as you prune some of the product out of there? Would you how us model growth? I am just trying to get a sense for what's implicit in that $713 million to $723 million? Was it about the mid-40s, lower or higher? And then you mentioned your plan to transition Japan which is interesting and the fact that you are going to capture all the revenue and not just half of it, I am wondering what level of revenue that contributes in 2017? What sort of level of business had you been doing in Japan that will give us a sense for how that's doubling?

Yes. Let me go to the first part of the question. We look at the revenues in this group of these acquired companies to be in the low 40s is about where we expect the business to be for the year. Again, whenever you have these situations that are on contract, most of this business is on contract and so there may be some potential for upside here as long as we can maintain that business. Where we see, again a lot of the growth potential is in the antiseptic cath business. Now, I will tell you that we have already started on Merit developed new products in that area and I actually have a couple of my competitors on the phone today from 3M. And so I want to go through and talk about all of our structure. But let me just say, we see that business growing from the $9 million, $10 million range to over $50 million or $60 million in the next three or four years. So we have a big plan. And let me also say this, these products, talking about the Argon acquired and the Catheter Connections as well as some other existing Merit products are all very, very complimentary. And I think that's the other thing is that we were not walking in there with other types of bandages or things like that. These are devices that complement each other and go together and we are adding some new ones. So we are excited about how this grouping works out and what it brings to the hospital in terms of a value proposition. Incidentally, a new hospital, we opened up one last week. It's a $100,000. They can go up to $300,000. This is a big business and a big opportunity with good competitors out there. We happen to believe that this is the best product on the market and I think the customer list speaks to that. So that goes to that particular issues that we are very excited. And I get so excited about the stuff I forgot the last part of the question. So Japan.

Japan.

Let me go back to Japan. So what the deal is, is that it moves up the revenue side. So let me break it out. At mid-year, we pick up on the OEM business. So that becomes all of Merit. On January 1, 2018 all of the other business now becomes Merit branded. So the real improvement in revenues and gross margins really happens in 2018 because we have to transfer but we will own all of the licenses and then we will operate it through sub-distributors, but it's almost 100% markup where we are. So it goes for something like $19 million, $20 million to $40 million and you get that additional margin. It's a 50% improvement and so it's a huge opportunity, but more importantly is having that whole product breadth and having the focus together. Again, our guys in Japan for years and years have done a nice job, but markets change, products change and there are too many channel conflicts and so we are looking forward to an opportunity to have that to be a big growth driver. But it's not just because you are going from wholesale to retail. You are going to see growth in real terms. And some people say, well the economy in Japan is this and its' flat and so on and so forth. I am just telling you that if you look at our stents, they are growing dramatically, our AERO stents and RTI stents. We have a number of those parts that we have introduced in those marketplaces and there is a lot of need for that. It's one of the biggest market areas in the world because of the stomach cancers, esophageal cancers that is kind of the national disease in Japan. So a little bit will come online. I would say about 20% of that mid-year. All of it is online by the first of next year. That doubles it. But in the meantime we are also adding, combining the businesses together. They will be working out of one office, one warehouse with one set of leadership and it's something that we hope would take, I think we needed these products to kind of drive that opportunity. And by the way, there are little if no caths, any caths being sold on our behalf in Japan, in China. There is a little bit and Saudi Arabia. But all of Europe and a good portion of this huge catheter has never been any of our products sold in St. Louis. So for my friends on the phone, I am coming to St. Louis.

Thanks for that color. One more and I will get back in queue. I appreciate it, Fred. One more. On the OpEx side, maybe Bernard for you. You said OpEx in line with 2016 levels. Were you implying the revenue as a percent or the expenses as a percentage of your topline guidance? It seems like perhaps OpEx is going up a little bit. As I run through the P&L, just given where you are guiding to on the gross margin line, if I held them at 2016 levels for the year, it actually looks like your earnings to be more in the $1.30 range. So it almost looks like your OpEx spending assumptions vis-à-vis your bottom line guidance is for OpEx to be a little higher as a percentage of revenue in 2017. I am just wondering if that's conservatism or what that is?

Well, OpEx will maybe a little bit higher as we integrate these two new businesses. And they are both international businesses. So there will have to be some investment made there. And again, there is a level of conservatism there to make sure that we are not over-promising and under delivering.

Okay. I will get back in queue. Congrats guys.

I think you said that rather nicely.

Thank you.

And nervously. So well done.

Thank you. Our next question comes from the line of Brooks West from Piper Jaffray. Your line is open.

Hi. Thanks. Can you hear me?

We can, Brooks. It's good to hear your voice.

Good. Good to hear your voice as well, Fred. So I am trying to just build up my revenue number for 2017. So bear with me here. But I want to make sure I got everything. Did you say that the Argon business that you acquiring was about $35 million, $36 million in revenue in 2016? So that would imply that Catheter Connections business was about $10 million. Am I right on that?

The Catheter Connections was a little lower. About $1 million of that was royalties that we received and the reason we are being a little bit conservative is that whenever you have these kind of transaction, there is always the risk that something can fall off or this and that. We just want to make sure. And then you have the FX impact from the year. We just want to be conservative so as not to disappoint everybody. So we are taking it -- what was the word you used, moderately conservative? Is that what you used? Or something like that. So the answer is, we are just trying to be careful so that we don't disappoint anybody. So I think we are kind of under promising here. Now if you look at the rest of business and take that $40 million out and you look from $703 million and then go to the bottom ends of the $730 million, that means there is about $60 million or $70 million on the $603 million, I think if that math is correct. And I think that speaks to our core business that just, Brooks, as a point of interest, you saw that even though the revenues were up a little bit in the fourth quarter, the core business was not. In fact that accelerated in the fourth quarter. So I hope that answers your question.

Yes. No, that does. And then you mentioned an FX impact, Bernard. Do you have an estimate of what your FX headwind will be next year?

We have actually built it into our forecast already. So we are seeing it primarily from China, Asia-Pac and that's possibly $3 million to $4 million that we know is going to be or potentially going to be an impact there, given the way the rates are going and how volatile it is at the moment. So we factored that into our number already.

So we have already reduced our number by that much, yes.

Okay. Got it. And then, I guess last for me, I was searching around trying to find a little bit more information on Catheter Connections and I couldn't find a lot. I understand in general what it is, but would love to hear a little bit more about just what those products are? And then would also like to get an update on the DFINE business, if you could? Some of the changes and growth expectations there? And then that's it for me. Thank you.

Okay. So let me go to the Catheter Connections. So Merit has known this company for a long time because it's here in Salt Lake City and their products are used, like there are a few other competitors in the marketplace. ICU Medical is a competitor. And so is 3M. And a number of years ago, they came out with these needleless connectors. I think they were called a clave and some of these products. And the problem with those products was at the clinical level you would swap them off, but there is ample clinical evidence that it didn't do a very good job by just having them swab with an alcohol wipe. And so these antiseptic caps go in and I believe that once they are on there, I believe this is correct, somebody jump in for me, that they once they go on there, they are now sterile there for up to eight days, I think is the amount of time. And when you are in there with a very critically ill patient, when these patient are coming to the Cath Lab and going back to the ICU, any type of these hospital acquired infections and these issues cost the hospital and of course maybe more importantly than the cost is what it does to the health of the patient. And it's not just the product itself. We have both the male and the female, but it's how they are delivered and these are on a strip. And by the way, this company has over 20 issued United States patents. So this is not just -- and they are actually very complex products. And then of course as I mentioned previously without going into detail, we also received royalties also from some other companies from some licensing agreement. So now, the other thing I am probably more excited about, again I have got to be careful here, there a lot of other areas in which this technology can be applied and particularly when we start talking about our transducer in critical care business. So I will leave it at that and say that we already have new products as we are speaking being developed that I think have as much potential as what you would do on these IV lines for these patients. So that's kind of the color. Now from distribution point, they used a master distributor. They have done a reasonable job. But again, as we all know in distribution situations, they are not as good as having your own warriors out on the street. And when you start talking about the kind of revenues that can be generated, it gets the interest of a salesperson. Now as I mentioned in my previous comments, there is a whole bunch of holes that we are going to fill in. And there is again China, there is Japan, there is all of Europe, there is so much opportunity here and Merit has all of that in place as well as bringing in the manufacturing. So we are going to produce a portion and we have an outside vendor that's going to produce it. We are going to mold all the parts. One of the biggest problems to this has been their ability to very candidly keep up with the demand They haven't been able to keep up with the demand and they didn't have the capital. So what Merit has done, is we have commissioned new tools or commissioning new automation and by the time we get to mid-year, we are going to be fully capable of producing substantial volumes. We can meet that demand now, but it's hand-to-mouth. That being said, for my competitors out there, I am coming to get you. Next question.

Our next question comes from line of Jim Sidoti from Sidoti & Company. Your line is open.

Yes. Can you hear me?

I can.

Great. Just back to the quarter, I just want to make sure I got everything correct. You said organic growth was about 7.9%. So that leaves about $8 million in revenue that came from DFINE and the HeRO. Does that sound about right?

Bernard, you want to confirm that?

Yes. That's correct.

Jim, can I add just a little color because I think it was asked previously about DFINE and I don't think I answered it. So let me come back to it. What we have done with DFINE is that we have done the training, we reduced substantially the expenses. We kept about half of the sales force in the United States but the other half, we trained existing Merit when formed that IOS division that we have talked about previously. We have started new R&D. So we kept the R&D team in place. And we are now developing some new products and new capabilities to go into that group. We are also doing some redesign work and we are improving products as well. So we haven't talked a lot about DFINE on the call, but by the time we get to about mid-year, there is going to be an awful lot of talking about it because there is going to be a lot of new exciting things that will then be presented. So it's not resting but it's kind of in that transition. So we have got all the work on the distribution. We have done all the work in consolidating customer service and took all of those expenses out the deal. So that's what we have done over the last six months. And by the way, Greg Fredde and the team that worked on this transition, I think also did a very good job to go through this transition. So that's that to that particular issue. And now I will answer any other questions you have.

So just to be specific, the breakout in that $8 million of acquired revenue, is that roughly $6 million from DFINE and $2 million from the HeRO? Or?

Yes. That's correct.

Hold on here. So that $8 million was just --

He is asking fourth quarter.

In the fourth quarter. How much of it was DFINE?

Just over $6 million.

Okay. I stand corrected then. Okay. Just over $6 million.

Okay. I agree. And now looking ahead, I just want to make sure I am clear on some of the comments you made. With the Argon acquisition in Japan, did you indicate you are going to go towards more of a direct sales channel in Japan now that you have got that under your belt?

Yes. We kind of refer to it as a modified direct, Jim. It's what we have been doing in China for many years. And that is, rather than to having a master distributors that then so you have a manufacturer, a master distributor and sub-distributor. In this case, we are coming out the master distributor. Merit becomes the master distributor. It doubles on revenue. It increases substantially our gross margins, but more importantly what it does is it puts us to close to our call point into our customer. So with the same type of model that we have used in China and we are convincing them. We speak the language. We have people on the ground. We have for a long time. We have our own logistics and our own customer service. So we are quite excited about the opportunities in Japan going forward. It's been kind of a laggard. To be very honest with you. Japan has been the laggard.

And do you think now that this deal is complete, you will be able to get some of your other products through those channels.

Yes. That's the other thing we have done. Things like the CorVocet. But all those other products that we have been selling have come over to Merit. And we own all those licenses or will own those licenses as this plays out. So we will have control of the business and control of the future. And as you know, whether it be in Europe or in Russia or in China, that's always been the key in the long-term for any of the bigger businesses and certainly for Merit. We get closer to the customer. We get better prices and more importantly than all that, that goes along with that, is we get to sell all of our products. We actually have products that we built that aren't being sold there because there is a channel conflict and that's what we will eliminate as well.

All right. And Bernard, if I am looking at the table in the back, it looks like amortization expense was about $0.27 for 2016. Where do you think that will go in 2017 now that you have these two new deals in the mix?

Amortization, I believe it's going to be closer to $0.30.

Okay.

With these new deals coming in.

Okay. And how about R&D spend? Do you anticipate any new trials or any new big investments in R&D in 2017?

No. Going back to what Bernard said and what we have committed to, we are committed to the discipline. There will be new R&D projects but they will be replacing old R&D projects that are now commercial. So are our goal is to have the discipline on the SG&A and on the R&D line while improving the gross margin line. And because of these new deals, you won't see a lot of leverage on those lines because of the projects we are starting up as a percentage of sales. But the gross margins are the key and those are accelerating.

All right. And how about with the tax rate? Do these deals have any material on your tax rate going forward?

At this point, we haven't forecasted any material impact until we see what transpires over the next number of months, what's going to happen with tax rate, particularly here in the U.S.

All right. And a couple more. So you talked a little about Catheter Connections and the impacts from the ACA. Did I hear you indicated that you think even if the ACA goes away, you don't think that will impact sales growth at Catheter Connections?

Not a bit. At the end of the day, if you are patient, you don't want to get an infection and hospitals don't want to have to have the cost of it. I mean you can't be efficient if you have people sitting in hospital being treated for things they go there. It doesn't make any sense. The ACA came out, but whether it's Medicare, it's not just ACA, it's Medicare and Medicaid and all these things that come out with plans saying, you have got to pay attention to these issues in your hospitals. And everybody gets a scorecard every year and that determines and a lot of people look at those to say where do I want to be treated. So this isn't going away by any means. And if you just think about it, Jimmy, would you like to do away the expense so you get an infection in the hospital. Nobody wants that. So it's not going anywhere. In fact, if anything, we have come more and more, as you think about superbugs and all the things that can happen, it becomes more and more safety and making sure that hospital acquired infections that you do everything you can to minimize or eliminate them. Those the key issues. You don't need the government to tell you what to do to come to that commonsense conclusion.

All right. And then kind of more of a bigger picture question. Now you are above the $700 million revenue company. You have got a lot of opportunity with these deals to improve the cost structure, the operating margins. Do you think you are going to take a little of a pause in acquisitions for the next three or four quarters and innovate what you have? Or you are going to continue to be an active acquirer?

Well, Jim I would say, excuse me, I am choking as I say this. No, I am joking. Listen, we have worked hard. This group has worked. I don't want to say we are tired. That's not the right word, but we have to digest these things and get them so that they perform. We did the HeRO. DFINE is still working. We have got to work these through. And more importantly, we have all these new products. So it's time for us to take a breath. Now that being said, I have new stuff coming every day. But I think we have to be able to afford it. We have to see the long-term impact. And we have to be able to keep in-line and we can't go out - I don't want to say it's a stretch but we have been playing a game and we have played five quarters last year. It was a lot of work. And I think we all need a little bit of rest. So I am not using much into rest, but we are going to take a little bit of rest. You know what, we don't need to do anything. Of course, we never needed to do anything on these things anyway. If you take all this stuff away, you would still have seen a -- you get of course, contributions from these deals and that's nice, but that's not what's driving the business. What's driving the business are really these and maybe in this first quarter, it will kind of fun for us to break out that core business and how that's driving because that's where the real action is. Think about it, if you take the HeRO and you take the DFINE, you are talking about $40 million of revenue out of $600 million. It 6% or 7%. Is that going to drive a business? And the answer is, it can a little but it doesn't really negate all of the other things that we are doing that I think are driving this. The stuff I mentioned about was the Ron Frost and his group. So there is my best answer.

All right. And then a last one for me on the acquisition note. There was a big deal that closed on, I think it was Monday or Friday of last week, the Vascular Solutions deal. Does that open up any distribution in terms of direct salespeople or independent distributors to Merit?

Well, I think I mentioned on one of the other calls, but if I didn't, the day that that was announced, they were, in my view, this is my personal opinion, there were 125 sales people sitting in Starbucks wondering what the hell they were going to do and what the future meant. And I think that played to our advantage. I think it will continue to play to our advantage because now it's close. Now they have to go through all that transition. And so the answer is, we actually have hired some of those sales people and I think it does open up opportunities for us. Disruption always creates opportunity.

All right. Thank you.

Okay. Jim, thank you.

[Operator Instructions]. We will be taking our next question from the line of Jayson Bedford from Raymond James. Your line is open.

Hi. Good evening guys.

Hi Jason.

For the sake of time, I will just throw in a couple questions. You alluded to it earlier, but gross margin on the acquired Argon and Catheter Connections business, where does that gross margin push out?

Yes. They start out at around 35% for the Argon in about 40%. The biggest upside is on the Catheter Connections because of our ability to mold and we think that's going to approach 50% and we think there is about 40% or so available to us. So there is upside on the Argon. Again, so one might say, they why would you do something like that. And the answer is this value proposition in this pull through. Those are the parts of the think. And looking at the business for the long term, it's the ability to go into at the sea level in the C-Suite and be able to then drive that value proposition. Now the only thing we get to do,, Jayson, is again, you will see other part of our business. For instance, we make a million blood pressure chips per year. That's now going to go to three million chips per year. I know that will take us a year to get there. But there is those kinds of things that start to integrate and create opportunity for the company and some of our other business units. And there are some other little sleepers in there. I will give you an example of one. So in talking to our people over in Europe this morning, one of things that was acquired was a reusable transducer. Now there is a situation in which the fully amortized cost of the reusable and the disposable is about $1. When you take a standard blood pressure transducer that costs your $5 and change and mark it up you are about $8. That's a $7 price differential in cost that allows us to go out and compete and pull through all kinds of business and in fact in talking to our guys in Europe, there were tenders and things that we couldn't get on because we didn't have one of those. So again, I think as we look, we are not just looking for this year and next year, but we are looking down the road five years and saying as Merit approaches and goes past $1 billion in revenue, how do we make sure that we have that offering of products that value proposition I talked about. So that s part of that. I also think that much like the British and lots of other people, Singapore is actually very strategic and the fastest growing area in our business. Look at places like Malaysia, Vietnam. You take a look at Indonesia. All of these places are places having a presence in that location makes a big difference. And so that was another part of our thinking is the strategic locations. Our ability to get product to Australia faster. Things like that. There was a lot of thought that went into the pros and cons of that location and when it came out in the value. I only paid $10 million for this business. And so someone might say, oh, well, there must be something wrong. Well, we are going just show you how wrong it was by showing what it does. And I mentioned, I tried to buy it five times. I know this business and I know the opportunities for it. And so does a number of other people. I can look at four or five in this room and they all are experts in this, because they all grew up in it sitting in here. So you look at the products. I will give you another example of an opportunity. So they make a product that was a patented product one time and one of our sales guys saw that and said, I didn't know we could ever do this and now we take a product that cost us about $4 and now we can sell it for UKP45 in the neural suite in London. So you go from UKP4 cost to a $25 product by taking some of these products that Merit didn't have and combining with products that we do have. So there is a lot of opportunities and you will just see the results as we move forward. There will be a lot of pull through and get a lot of the strategic and tactical opportunities here too, including Japan. Remember one of the things I said was is that, they have a relatively good business in Japan at higher profits. We are going to take and almost double our revenues there. And we actually have not calculated into our numbers taking out that middle person. So there is a lot of upside in this business but initially, the numbers I gave you stand in terms of the growth and the margins.

Okay. That's helpful. Just on the operating margin assumed in the guidance. It would imply something in the range of 12% to 12.5%. I am guessing what could drive that higher? Is it largely dependent on upside to revenue? Or do you feel like you have some flexibility or some cushion on the OpEx line to drive some better op-margin?

Well, just as you said that Bernard looked at me with a twinkle in his eye. So Bernard go ahead and hit it. Tackle it.

There is opportunity on the OpEx line for us to continue to lever that. And again, as I mentioned earlier, we are just conscious that we are integrating two new businesses, we want to make sure that we invested them correctly to make sure that we can drive growth both on the margin perspective and the revenue perspective. So there is some opportunity there.

I think the mix has a lot to do with it too. I mentioned the Sync, the radial thing continues to grow. The HeRO, Merit is going to start putting on think HeRO and continue to think radial. Another product that we have not discussed is a product called the Surfacer. Merit now is the exclusive distributor in Europe for a procedure called Inside-Out and this is a product that we have the distribution rights for. And you look at the TWISTER. One of the things I would encourage you guys to do, because I think it will pretty well answer pictorial question to answer is in our slide deck. I think they are pages nine and 10, but it shows the growth drivers. So take a look there. There you will see the NINJA. You will see the Sync. You will see the Heartspan. You will see the TWISTER. You see all of this stuff. I think we are pulling up the slide right here. It's nine and 10. You take a look, you see the Amplatz. You see the Super HeRO. You see the True Form. Jason, look at all of this and it's all been R&D expense. Now that's going to turn into revenues and improve gross margins. I have never seen anything like this in our history. I have never seen anybody with something like this. Take a look at those slide because I think they are kind of telling about the opportunities.

Okay. That's helpful, Fred. I appreciate it. And I will jump back.

Okay. Great. Thank you.

Our next question comes from line of Gregory Macosko from Montrose Advisors. Your line is open.

Yes. Thank you.

Hi Greg.

Hi there, Fred. Yes. Most of the questions have been answered here. A lot of good answers but one I wondered about taking a step back. With respect to the Cath Lab and Cath Lab selling, it appears to me that we look at the bigger picture, there has been an increasing percentage of total sales being sold through the Cath Lab and my senses maybe some of these hires from Starbucks that you have taken on are helping that. Talk a little bit about that? And should we expect more and more products to be sold to Cath Lab?

Well, let me clarify a little bit. First of all, I think the guys that we hired are just coming on. So I don't thing they have had any effect there. I think what you are seeing when you talk about the Cath Lab is Merit clearly has about almost half of its business, but the real growth is coming from our electrophysiology area. These are areas like the Heartspan and the SNAP. We have another new product that is a non-valve snap that's coming about mid-year. So I mentioned earlier that we have not only the products you are seeing, but more right behind this. So I think it's the Worley system, all of those particular things that came out of the Thomas transaction a few years ago are really what's driving that part of the business. And the other thing, of course, if I were to look at these slides and I am just going ask you slip back here and look at this one more time and go to slide number nine. The thing that's kind of cool about this, as you look at these slides you see the endoscopy business with the Snare. You see the balloons, which is endoscopy. You see the IOS with the SwiftNINJA and the CorVocet and you see the cardiology and I do think you will see a big move in cardiology. And then if you go over to page 10, you will look at the additional products there. You see the HeRO and you see these other products on it. But the thing that's nice about where we are heading is these things are kind of divided out with two or three products in each of the divisions. And I think that's another really important thing to get the kind of attention to these products that we like to have. They are spread out. So it's a nice mix, I feel. I have never seen anything like this in all of our years.

Okay. And then last question is with regard to Tijuana. Where do you stand there? Are you kind of fully up and running? Is there much more to come through in that operation? Obviously you have put in new products and things down there, but talk about that and where we stand in terms of it being at full blast?

Yes. Well, we are at about 50% capacity and thank God for Tijuana. And I will tell you why. Because if I didn't have it, I couldn't have this growth. I mean I have a 3.25% unemployment rate in Utah. So hiring people here is very, very difficult. We were able to move and now have 650 employees there, give or take and that we did all without losing a single job in Utah. So essentially these new products are coming through absorbed and we are able to get into a cost climate and the availability of labor. And one other point, Greg, I would like to talk about too about Tijuana. A lot of people talk about this quarter tax that's coming up. What's also interesting to know is only about 10% of the cost of our product out of Tijuana is labor and overhead. The rest of it is value-added molding and capabilities that come from Salt Lake City to go there. So a lot of people got all freaked out about this border tax. First of all, I don't think it's ever going to happen. But if it does, it effects 10% of the revenues that come out of there. So it's really quite minimal for Merit. So I want to sneak that question or that answer or that comment in as well.

All right. Very good, Fred. Thanks.

Okay. Thanks Greg. I look forward to seeing you in New York on Thursday.

Good.

Thank you. Our next question comes from the line of Jason Mills with Canaccord Genuity. Your line is open.

Thanks Fred for taking the follow-up. So Bernard I wanted to go back to just the cadence to the year. I understand you don't give quarterly guidance but obviously the street holds your feet to the fire every the quarter and Fred knows that very well. So I am sensitive to wanting to make sure we think about the quarters properly and you have got a couple of the business is coming online that are on a $700 million topline, $40 million, $45 million is not everything, but it is a significant a piece of it. So how should we think about the topline as you weave these businesses in and you are just now launching SwiftNINJA which presumably will escalate as the year goes on similar to Super HeRO and some the other products Fred mentioned. I just want to make sure that we are all calibrating the quarters properly. I understand you don't give guidance quarterly. Maybe you could help us, just give us color with respect to how things play out?

So if we take out all of the transactions, I think we can go back and look historically for a moment. We usually see in the first quarter and I think Bernard's comments were reasonable in that usually in the first quarter, you are starting up, you have some lag, as I mentioned, we don't give credit to product until it's introduced and sterilized. And then you also have the higher expenses because of FICA and that sort of things. If you look at our business historically, it's a little lower in the first quarter, starts to accelerate in the second quarter, in the third quarter it's generally the summer quarter and it's about flat and then as you get into the fourth quarter, it starts to accelerate. I think that that's the same type of thing you see even with the transactions. Now I am going to sneak one other comment in here too. In addition to the purchase price we also and I am not going to get into a lot of detail here, but we also believe that during the first six months as we are integrating this business that we are going to be able to have some offsets that will help to not defer but actually cover the cost of some of the transition into these deals. So we are going to get some help there as well by the ability to reduce what some of those transition expenses are. That's all I can really say about that other than -- So what I am trying to say, there are other parts of the deal that allow us to reduce the expenses of the transition. So we paid $10 million, but there are other considerations that come in place that help us to reduce that. Not the costs, but the expense. So that's going to help us as well.

And then just on the revenue, Q1 usually is, if you just look at our trends, that's usually our lightest for the reasons that we have just mentioned and you will have that, DFINE will be added in for the first quarter, full quarter of HeRO and you are just going to have two months revenue from the two acquisitions that we did. And given that, I will put it this way, that the riskiest time for us is when we bring on businesses is in the first probably two to three quarters of bringing that business on from a revenue perspective.

Okay. That's helpful. So two months worth of Argon and Catheter Connections in the first quarter and then beyond that we can kind of run rate it on an annual revenue base of somewhere in the $40 million to $45 million range.

Yes. And the first quarter is probably going to be our most challenging from Argon and Catheter Connections.

But I think that's hard to say --

When you are considering that number.

Yes. I think you said this, it's with any deal you would see the same situation. I don't want to sound like a downer. But first, as you are bringing that on and then very candidly one of the other things, because I am going to add actually a little optimism, we also took into consideration some of this and made sure we had a lower number too. And by that, I mean a lower number, we gave some room and allowance that you could have some stuff fall off. So I don't want to make this sound like somehow --

No. That's why the allowance is there. Because once we get traction, we get our own people in place, we will start to grow that business. But it is just Q1 and Q2 is where we have made the allowances.

Okay. That's helpful. And then one final housekeeping item. Bernard, in 2017, the net other expense line sort of have been running in that $3 million range, a little under $3 million range. How should that track through 2017, considering some of these new transactions and what you have in terms of your debt load?

Yes. That expense will increase for 2017 as we form that debt.

So you are looking at $3 million range or a little higher than that per quarter?

A little higher.

Okay. Thank you guys.

Thank you. [Operator Instructions]. I am seeing no other questioners in the queue at this time.

Okay. So let me go ahead and summarize. First of all, thank you for joining us. I hope I have explained these transactions on why we think, both tactically and strategically why we think they are important to us. Again I would call your attention to the slides and look at the overall business. I think we have been conservative. I think there is opportunity and our job is to give you the numbers that we know we can make. And then do everything we can to out-do those. That's always been the goal. I think that the new products are exciting. But again, the proof is in the pudding. We have got to go out and deliver. One other point in that first quarter too is that, that's usually when we have had all the sales training. So we have had all the divisions, have had their meetings, have done their training and we are out there and we are not in Starbucks. We drive past Starbucks. We may stop in the Starbucks in the hospital. But our guys are out there pounding the pavement with a lot of these new products and these new opportunities. And we are hearing success stories every day. And so that's going to be the fun part is going through and watching the business as it moves through the year and meeting or exceeding our goals and completing the three-year plan. And as we watch the business, if we think it's appropriate to do so, we will make whatever adjustments as we finish the first and second quarter. So we are excited. I mean I hope you don't go away from this thinking that somehow there is a downer or we are concerned, because we are not. What we are, is engaged, excited about the businesses, things are accelerating, gross margins, I am going to say it again are accelerating and that's the key to this while having the discipline to maintain the expense levels and we know that does not what they can do for our stock. So our thanks to all of you for your interest. Bernard and I will be here for the next hour or so. We are happy to add whatever we can from a clarification point. And again, we will go ahead and sign off. I am going to give thanks to my staff for a great year and for all your efforts and we will sign off wishing you a good evening from Salt Lake City. Good night.

Ladies and gentlemen, thank you again for your participation in today's conference. This now concludes the program and you may now disconnect at this time. Everyone have a great day.